Mexico City Subway Snafu Irking Commuters Sinks ICA Stock

Former mayor of Mexico City, Marcelo Ebrard, told reporters last week he was "tranquil and proud" about Line 12, adding that the project was supervised by city officials, the federal government and lawmakers. Photographer: Susana Gonzalez/Bloomberg

March 18 (Bloomberg) -- A service halt on a new $2 billion
subway line built in partnership with billionaire Carlos Slim is
making Empresas ICA SAB Mexico’s worst performing stock.

ICA shares slumped 15 percent last week as Mexico City
officials closed more than half the stations on the capital’s
Golden Line after deciding that twisted rails and damaged ties
were endangering passengers. Last week’s decline, the biggest
among members of Mexico’s IPC index, pushed the Mexico City-based builder to its lowest price since June 2012.

The subway case is unfolding as ICA seeks new contracts
following a 22 percent sales decline last year, when Moody’s
Investors Service and Standard & Poor’s lowered the company’s
rating as construction activity weakened. The Golden Line, which
opened in October 2012 and is the newest part of Mexico City’s
subway system, was built by an ICA-led group that included a
unit of Slim-controlled Grupo Carso SAB.

“Mexico City is one of the most important clients that the
company could have, so any bad relationship could certainly
hamper its ability to gain further projects in the area,”
Javier Gayol, a Corporativo GBM SAB analyst who recommends
selling ICA shares, said in a telephone interview from Mexico
City. “There’s a lot of bad news around this.”

For Cristina Malvaez, the service suspension that may last
months means five hours less with her family each week. Instead
of boarding a train at the elevated Calle 11 stop, Malvaez, 56,
now waits outside the station’s shuttered doors to ride one of
the aged, pea-green and orange-striped buses that pass every few
minutes.

“The closing has added about an hour to my daily
commute,” she said. “The inauguration of this line was so
hurried that it was done poorly. Now we are all paying for it.”

Finger Pointing

ICA shares lost 25 percent this year through March 14, the
second-biggest decline among the IPC’s 35 members. The index was
down 11 percent in the same period. Shares advanced 4.3 percent
to 21.08 pesos today at the close in Mexico City, the biggest
gain in two weeks, as the IPC rose the most in more than five
months with a 2.3 percent increase. ICA’s Mexican stock has 10
buys, four holds and three sells, according to analyst
recommendations tracked by Bloomberg.

Carso fell 3.8 percent last week and 9.2 percent this year
through March 14. It rose 5.6 percent to 66.63 pesos today, the
biggest gain in more than eight months.

ICA Chief Executive Officer Alonso Quintana said the Golden
Line’s rails were incompatible with trains provided by Spain’s
Construcciones y Auxiliar de Ferrocarriles SA, or CAF. ICA,
which has had a hand in building all 12 lines of Mexico City’s
Metro, as the subway system is known, is confident it won’t face
liability or a tarnished reputation after investigators
determine what went wrong, he said.

“They’re bringing in specialists who will certify who is
responsible for these issues,” Quintana said in a telephone
interview last week. “We’re confident that we’ll see it has
nothing to do with how we built the lines.”

‘Perfect Condition’

CAF didn’t participate in the design or construction of the
subway line and built the trains according to the specifications
requested by the Metro, Maximiliano Zurita, head of CAF’s Mexico
unit, said in an e-mailed response to questions.

The 30 trains provided by CAF for the Golden Line, also
known as Line 12, are in working order and have been regularly
tested, he said. “I can assure you with conviction that the
trains operate in perfect condition,” Zurita said.

Local lawmakers from the National Action Party, or PAN,
place the blame on former Mexico City Mayor Marcelo Ebrard,
claiming he rushed the inauguration of the Golden Line prior to
leaving office in December 2012.

Assure Safety

Ebrard, from the Democratic Revolution Party, told
reporters last week he was “tranquil and proud” about Line 12,
adding that the project was supervised by city officials, the
federal government and lawmakers. He also used his Facebook page
to publish an October 2012 report from a German engineering
group certifying that Line 12 was operating correctly. The
former mayor couldn’t be reached for additional comment. Phone
calls and messages to his press representatives weren’t
immediately returned.

Jorge Serrano, an investor relations executive, didn’t
return an e-mailed message seeking comment yesterday, which was
a holiday in Mexico. Carso executives weren’t in the office,
according to a person answering the main telephone number. A
Carso investor relations executive couldn’t be reached.

The line was partially closed to assure passenger safety
and authorities must not be “overconfident or complacent” when
dealing with a potential risk, subway system head Joel Ortega
said in a statement last week. The Metro referred requests for
additional comment to the city’s transportation department,
which didn’t return calls.

ICA Contract

ICA is still in negotiations with the Mexico City
government for an additional $200 million it says it’s owed for
work on Line 12, Quintana said March 15. The company is
confident that the partial closing of the Golden Line won’t
affect those talks, he said.

If ICA is ruled to be at fault for the Golden Line, any
fine could be deducted from those outstanding payments, which
may be as high as 4 billion pesos ($304 million), Ana Hernandez,
an Invex Casa de Bolsa analyst who recommends buying the
builder’s shares, said by phone from Mexico City.

“ICA is one of the most important construction companies
in Latin America and definitely in Mexico,” said Luis Maizel,
who manages about $5.5 billion of fixed-income securities as
president of San Diego-based LM Capital Group LLC. “Obviously
this situation doesn’t help the company, but I think that very
soon this will become an attractive buy for investors.”

The builder may benefit from recently approved
constitutional changes to bolster private-sector investment in
the energy industry, Maizel said. Yields on its bonds maturing
in 2017 have fallen 75 basis points, or 0.75 percentage point,
this year to 7.93 percent.

Fare Increase

“The bonds are holding up really well,” Carlos Legaspy,
who oversees about $350 million in emerging-market debt,
including ICA bonds, at InSight Securities Inc., said by phone.
“Where else can I find a 2017 maturity at these yields?”

The Golden Line carried about 92 million passengers last
year, according to the Metro system’s website. There were more
than 1.68 billion passenger rides on Mexico City subway trains
in 2013. The city raised fares to 5 pesos from 3 pesos in
December, inciting protests at several stations.

“Prices were raised 2 pesos so we could get service like
this?” said Jose Luis Rodriguez, as he stepped off a crowded
bus at the closed Calle 11 train station on March 14. “Opening
this train line has now just made things worse.”